Bajaj Hindusthan: No gain from sugar cane

The company’s foray into thermal power will counter the cyclical nature of the sugar business.

No doubt, sugar is a cyclical sector. The sugar stocks can rise three times or drop to a third within a year, with little regard for broad market conditions. Global factors (weather, acreage, consumption), diversion to ethanol or domestic factors (monsoon, politics) can drive prices and, hence, the fortunes of sugar companies.

This uncertainty seems to be the reason why a sugar producer like Bajaj Hindusthan is foraying into the power sector. Already diversified into particle board and medium-density fibre operations, it has entered the thermal power business. The company had signed a memorandum of understanding (MoU) with the Uttar Pradesh government for a 2,430-Mw power capacity, of which 450 Mw is already being commissioned and will be ready for captive consumption by the end of 2011. It will now invest Rs 10,000 crore to set up the remaining 1,980 Mw capacity.

In the non-sugar revenues, the company’s bagasse products subsidiary has begun production and is expected to bring revenues of Rs 200 crore for the year ending March 2011. On the ethanol front, profitability is likely to increase, with the recent revision in ethanol prices to Rs 27 a litre from Rs 21.50 earlier.

While the benefits from bagasse-based products and ethanol will accrue immediately, power generation will yield results only after a few years, given the long gestation period. For now, sugar will continue to contribute around 90 per cent to the company’s revenues. In the new sugar year (October 2010 to September 2011), companies are likely to gain on crushing, as estimates suggest 22-23 million tonnes of cane production against 18 million tonnes this year. With higher production, procurement prices are likely to be subdued.

However, with the government under pressure to control food inflation, there may not be much headroom for sugar prices to go up in the near future.

source: BS